In a development that should have important repurcussions throughout the home video industry, Buena Vista Home Video (the home video arm of the Walt Disney organization) shipped 715 thousand copies of Pulp Fiction to the home video market on the 7th of September. Pulp Fiction is the breakthrough film from the new film director Quentin Tarantino that grossed over $105 million at the box office. It was expected to do well in home video, but no one expected it to ship quite as many units as it did.

For those who are interested in whether titles make the market, the release of this film is a major test of the pull of a demonstrably popular film against an ebbing market. For those who insist that stores are chronically undersupplied with copies of feature films, the tremendous number of units shipped on this title is an important test case. For those who are interested in the impact of practically "unlimited availability" offered by video-on-demand, this release provides a point of reference.

Most importantly, however, home video retailers simply trying to run their businesses made an important, serious, avoidable mistake in ordering this title.

• The timing of orders was off; it doesn't seem to make sense to make a major commitment to a movie of even possibly limited breadth at the end of a weak summer season and the rental market headed into a seasonal trough.

• Order levels from retailers appear to have been driven less by an assessment of interest in the title and market conditions than by perceived competitive pressures; some retailers were able to order "discounted" units through the Rentrak pay-per-transaction system and they ordered in depth; other retailers, presumably concerned about being left out and without regard to demand or market conditions, over committed by ordering full price units in quantity.

(Exhibit 1 shows rental activity for the first 13 weeks on this title. Compare the lack of a peak on this title to the recent "typical" A-Title pattern in the exhibits below. The real question for retailers is whether flooding the shelves with a strong title creates extra demand for that title -- or whether it simply shifts demand from the tail of rental activity forward. Continued tracking of this title will also help illuminate this question. Updated 01/04/96 )

Total rentals divided by total units shipped works out to about 11.4 rentals per tape or about 2.9 rentals per tape per week. This number is low for a major rental title. For a top "A" title that is offered as a rental product, recent turns per tape have been reported in the trade press between 4.7 and 5.5 rentals per week. On average, Pulp Fiction is renting at about 40 percent off the rate that a typical "A" title would generate on a per copy basis.

Based on our experience with stores that use the Rentrak system, we believe that they would have tended to order this tape in quantity and thus have below average turns per unit; while stores that paid full wholesale price would have stocked fewer units and would have had higher average rentals per tape per week. We estimate that the turns per week on this title for a Rentrak store would be about 2.2. Since Rentrak tapes were estimated in the trade press to be 115 thousand units out of the total 715 thousand units shipped, the other 600 thousand full price units must have been renting about 3.0 times per unit. This is marginally better, but not good enough.

Rentals vs Total Market

As Exhibit 2 shows, the rental market has been weak all summer. It regularly dips through the Labor Day weekend going into fall because of school openings, the premier of the Fall Prime Time Schedule, and this year, the World Series run up. The declines in the market this year due to these seasonal factors were all the more serious because of the low starting point. This seasonal pattern has been observed in every year since the Video Flash tracking system was initiated, except for last year because of the baseball strike.

The release of Pulp Fiction into the teeth of this downdraft had absolutely no measureable impact. The overall market dropped as precipitously as it had been and appeared no better or no worse for the availability of this one title.

What the deep availability of this title did do was shift rental activity away from product already in the stores to this new title. As a result, we show Pulp Fiction absorbing about 4.2 percent of the total market during this period -- and about 22 percent of the total rentals of the top 20 titles. This degree of concentration in one title that can do nothing to lift the rest of the market decreases retailer profit by shifting rentals away from titles that are already paid for toward a title on which money is owed. This is a reduction in cash flow and overall profit.

Retailer Profit on Investment

Home video retailers count on the surge of rentals early in a new release's life to pay for the cost of the tape. Exhibit 3 shows how 5 recent "A" films have rented in the home video market. Exhibit 3a shows the week by week rental pattern; Exhibit 3b shows cumulative rentals. These exhibits have been scaled to represent percent of rental transactions per week.

At a typical $3 per rental and an average $66 wholesale cost, it takes 22 or 23 rentals to pay for the tape and that usually takes from 4 to 6 weeks. In the first 4 to 6 weeks, a top "A" title "uses up" about 40 percent of its total rental activity over its first 6 months. Very few stores hold their new releases this long, although some titles in Blockbuster stores are held as "new releases" for this long or longer. For the retailer who only holds his new releases 6 months, the first 4 to 6 weeks represents about 40 percent of the potential cumulative rentals he has on that tape.

In the case of Pulp Fiction, retailers who invested in multiple copies of this title have little or no prospect of getting their money back in less than 8 to 9 weeks. At about 3 rentals per week, $3 per rental, and a wholesale rate card price over $75, it would take that long to pay for the title. At that point, the retailer has a much smaller pool of remaining rental potential from which to generate profits. We estimate that at the end of 9 weeks, retailers have about 37.5 percent of total potential rental activity in front of them if they hold for 6 months; they might pick up an additional 10 percentage points of potential rentals if they hold for a full year after initial release. And of course, these are averages. Some retailers will have lost significant rental volume on this title because they are not able to convert potential downstream rentals to actual transactions.

The Bottom Line

Our analysis of the retail purchases of this title suggest that retailer ordering had the effect of cutting their profits on what should have been a solid "A" release in the home video market to "B" title levels. A title that should have paid for itself in the usual 4 to 6 weeks and gone on to make another 100 percent profit before the 6 month mark will now have a stretched out pay back period (to earn back its initial cost) and a riskier and lower profit generating period. We estimate that on average, this title may earn about 60 percent profit before the 6 month mark for those retailers that can successfully hold and market the title to their customers over that period.

Because Pulp Fiction now has a longer payback period, 9 weeks instead of 4 to 6, the money that was invested in acquiring this title is tied up for a somewhat longer period. We believe that this will make retail ordering decisions more difficult on titles with order close dates in the mid-September to late-October time frame. One has to wonder whether improved delivery — whether through electronic "video on demand" via wires or increased copy depth in stores — of this title has anything to do with whether people want to watch it. Entertainment products may not respond ike package goods, where there is a correlation between shelf space and sales. Finally, Pulp Fiction did not move the market at all. It is a solid title. It had a good release window and great marketing support. But the market was moving into the early September trough, and that seasonal momentum (which is tied to very strong forces outside the home video industry) is simply not going to be changed by the release of one title.

All these factors together remind one of the story of the English King, Canute, whose courtiers told him that he was such a powerful king that if his throne were at the edge of the sea, the tide would not come in. He ordered his throne carried to the beach, and as his feet got wet, he ordered his courtiers to the chopping block.